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Effects of downstream entry in a supply chain with a spot market

Author

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  • Wei Xing
  • Qi Zhang
  • Xuan Zhao
  • Liming Liu

Abstract

This article contributes to research at the interface of marketing, operations, and risk management by investigating the effects of downstream entry in a two-echelon supply chain with risk-averse supply chain members and a liquid spot market for trading intermediate goods. We find that at downstream entry, the upstream supplier may decrease the contract price of the intermediate goods to balance its risk-free utility from the contract channel and its risky utility from the spot market; correspondingly, downstream manufacturers may increase their contract quantities. As a result, downstream entry may hurt the supplier and benefit the incumbent manufacturers. We also identify situations where downstream entry can lead to a “win-win-win” situation, where the supplier, incumbent manufacturers, and final product consumers all benefit from downstream entry. Furthermore, when spot price volatility is high, the supplier may engage in speculative trading, but downstream entry discourages this speculative behavior. We conclude that these results are driven by the combined effects of spot trading and the risk attitudes of supply chain members. Specifically, the effects of downstream entry are dramatically affected by the risk attitude of manufacturers, but only slightly affected by that of the supplier. Finally, we find that the main results hold when the supplier’s capacity level is endogenous.

Suggested Citation

  • Wei Xing & Qi Zhang & Xuan Zhao & Liming Liu, 2019. "Effects of downstream entry in a supply chain with a spot market," IISE Transactions, Taylor & Francis Journals, vol. 51(10), pages 1110-1127, October.
  • Handle: RePEc:taf:uiiexx:v:51:y:2019:i:10:p:1110-1127
    DOI: 10.1080/24725854.2018.1550825
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    Cited by:

    1. Ma, Shanshan & Li, Guo & Sethi, Suresh P. & Zhao, Xuan, 2022. "Advance booking discount strategies: Competition, information transparency and spot market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 158(C).
    2. Liu, Guanmei & Wang, Haijun & Shao, Xiaofeng, 2023. "Technology investments into a supplier with upstream entry," European Journal of Operational Research, Elsevier, vol. 305(1), pages 240-259.

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